Monday, August 08, 2011

Republicans own this downgrade

I would like to think that I am not a shill for the Democratic Party. I realize that my extreme liberalism on social issues biases me toward looking at the GOP as an enemy tribe. So whenever I find myself thinking "Dang it, there are no two ways about it, Republicans got us into this mess," I first sit down and think of all the reasons why I'm wrong

But when it comes to this downgrade and the market crashes that have followed, I just can't see any reasonable case for political neutrality. I agree strongly with Felix Salmon, Paul Krugman, Greg Ip, Menzie Chinn, Jeffrey Frieden, and James Surowiecki that the dovngrade is not about the U.S. debt level (which is not that high, given interest rates, historical precedent, and international comparisons), but about the dysfunctionality of American politics. And the dysfunctionality of American politics is all about the Republican party -"an extremist right that is prepared to create repeated crises rather than give an inch on its demands," to borrow Krugman's phrase - but also about a system riddled with institutional tripwires (debt ceilings, filibusters, etc.) that allow that minority faction to hold the rest of the government hostage. S&P - which seems to operate on intuition rather than on any kind of math or model - seems to have simply smelled the crazy fumes emanating from the Tea Party. I smell them too.

Republicans, of course, say otherwise. They claim that the downgrade is really about the level of U.S. government debt. Just for the sake of argument, let's grant them this unlikely assertion, and then let's ask the question: Who, then, is responsible for all this debt?

And although I tried my best to think of reasons why this isn't the case, I just can't avoid the answer: Republicans. The Republicans created the national debt.

Here is a graph of historical U.S. gross federal debt levels as a percent of GDP:

The graph is divided by presidential administration. The obvious fact is that, until the 2008 mega-recession hit, all of the increases in debt happened under Republican presidents. But the president is not a dictator, and so we should also look at a graph that breaks it down by which party controlled Congress:

Looking at this, it's much less clear that Republicans caused the debt, since the one instance of declining debt happened under a Republican congress. So we'll have to dig deeper into the historical record to find out whether my claim is truth or hackery.

The 1980s

The U.S. federal debt declined pretty steadily from WW2 to 1980, at which point it began to increase pretty steadily (What changed? Answer coming up...). The period of 1981-1992 saw a near-doubling of debt, from about 34% of GDP to about 66%. This happened under two Republican presidents (Reagan and Bush I) and a Democratic congress.

What policy changes were made in the 80s? Well, income taxes went down. Here is a picture of U.S. tax revenues as a percentage of GDP:

As we can see, the fall in revenue in the 80s wasn't huge - maybe 1% of GDP over the decade. This is partly because the economy grew fast enough to offset some of the tax cuts that Reagan made in 1981. But it is also because Reagan, worried that his tax cuts would lead to exploding deficits, raised taxes during the remainder of his presidency.

Another policy change was an increase in defense spending. Here is a picture of U.S. defense spending as a percent of GDP:

The Reagan-era defense buildup was actually pretty small - about 1.5% of GDP over what we were spending in the Carter era.

So neither Reagan's tax cuts nor his defense buildup were particularly huge. The thing is, they were sustained. Even a small deficit adds up over time, and sure enough, by the end of the Reagan-Bush era, our national debt was almost double what it had been at the start, despite solid economic growth for most of that period.

Caveats: Of course, as I noted before, Democrats controlled Congress during this entire era. Since Congress is the entity that votes on the budget, shouldn't I be blaming the Dems? Or at least dividing the blame equally? Well, there are two reasons why I place the lion's share of the responsibility on Reagan. First of all, lower taxes and increased defense spending were Republican priorities, not Democratic ones. Basically, Reagan got his way! And second of all, federal non-defense spending (as a percentage of GDP) took a sharp dip in the 80s, and only recovered to its previous level by the end of Bush I's term. So even if Dems wanted an increase in domestic spending in the 80s, they didn't get one. "The beast" didn't exactly starve, but it went on a diet. So again, Reagan seems to have got what he wanted despite the Democratic-controlled congress.

I conclude that Republican presidents, and not Democratic legislators, were responsible for the 1980s debt runup.

But - and this is more guesswork on my part than hard fact - Reagan seems to have done more than just boost the debt during his term. By shifting us from an era of steadily falling debt numbers to steadily rising ones, he seems to have created a political "new normal" - a green-light to future U.S. politicians to continue the debt binge. Don't take my word for it - this idea came straight out of the mouth of Dick Cheney. In the jargon of public finance, Reagan shifted us from an AGV mechanism (balancing budgets by taxing the rich) to a Groves-Clarke mechanism (running deficits in order to please everybody). And since Reagan was a Republican, it seems only natural that the GOP would be more eager to embrace the new, debt-fueled politics - it was the party's new road map to victory.The 1990s

In the 90s, the runup in debt was halted, then temporarily reversed. The big showdown came in 1993, when Clinton rammed through a massive batch of spending cuts and tax increases. Every single Republican in Congress voted against the bill, and it passed by one vote. I repeat: every single Republican voted against the bill.

But the bill passed, and it worked. The rise in debt was halted (see graph above). In the latter half of the 90s, the new higher tax rates and lower spending rates were maintained even as economic growth accelerated, leading to a fall in gross federal debt back to below 60% of GDP. A Democratic president and congress therefore seem responsible for the brief drop in debt levels that occurred during the 90s.

Caveat: Congress, however, was controlled by Republicans from 1994-2000. These Republicans attempted to slash federal spending; their effort was blocked by Clinton in the government shutdown of 1995. It is easily possible that, if Clinton had allowed these spending cuts to take place, debt would have fallen by even more than it did. It is even possible that such a victory would have led Republicans to conclude that spdnding cuts were a viable path to electoral success, and relied on spending cuts instead of the mix of tax cuts and spending increases that Bush II eventually implemented. We'll never know.

Caveat 2: The rise in GDP during the late 90s is sometimes attributed to Clinton's policies (including the 1993 deficit reduction), but Clinton himself attributes it to luck. So while Clinton should get the credit for halting the long debt climb of the Reagan-Bush I years, by his own admission he should not get the credit for the fall in debt that followed. Nobody should.

The 2000s

The 90s made a lot of people think that the debt rise of the 80s had been a one-time thing, and that we would hold steady around 60% of GDP, a manageable number. The 2000s proved them wrong. As you can see from the above graph of tax revenue, Bush II's tax cuts were truly enormous - over 5% of GDP. These were passed by a Republican congress. And spending rose strongly during Bush II's tenure, on both defense (wars and homeland security are not included in the above chart), and on entitlements (Medicare Part D). As a result, debt began to rise again, hitting the low 60's in 2007 before the big crash and recession.

Again, we saw debt rising as a percent of GDP during an economic expansion under a Republican president who got most of what he wanted from Congress.

Caveat: Bush tried to balance out the Medicare expansion with a large stealth cut in Social Security payments ("privatzation"). This was blocked by Democrats. Democrats could possibly have allowed Bush to shift entitlement spending from Social Security to Medicare instead of raising it overall, but they chose not to. So Democrats bear some of the responsibility for Bush's deficit increase.

The Crisis

Despite the raft of tax cuts enacted as part of Obama's 2009 stimulus bill, the fall in GDP from the recession was so large that taxes have risen as a percentage of output. Spending, however, has risen even more, mostly due to automatic stabilizers - unemployment insurance and the like - rather than to active policy choices on the part of government. Also, to truly measure the impact of a regime's policies, one ought to compare the beginning and end of the regime, and Obama's presidency (and the current divided congress) isn't over yet. So I will reserve judgment on who bears responsibility for the runup in debt that has occurred since 2008.

Note that this debt runup, unlike the ones under Reagan, Bush I, and Bush II, has occurred during an economic contraction (where the GDP denominator is shrinking), rather tan during an expansion (when debt should logically fall as a percent of GDP). That is very important.

But even if you were to follow the pure Republican party line and blame all of the increase on Obama, note this: Debt is now approaching 100% of GDP, which is over the 90% level that Kenneth Rogoff like to talk about. If the Reagan-Bush I debt runup had not occurred, we would only be at 70%. If the Bush II tax cuts had not occurred, we would probably be around the same level or slightly higher. If neither Republican debt binge had occurred, anyone who tried to question U.S. solvency would be laughed out of the room.

So this is why, even if for some reason we chose to willfully ignore the fact that the S&P downgrade is about nutty Tea Party Republicans and broken U.S. institutions rather than about debt levels, we would still have to conclude that it was the GOP brought us to this point.

That's why, try as I might to avoid getting political about things, I just can't be neutral. No Democrat (to my knowledge) ever said that "deficits don't matter." No Democrat (to my knowledge) ever said that a sovereign default was a good idea. Whether it's debt-ceiling brinksmanship or irresponsible deficit spending, the Republicans own this downgrade.

19 comments:

Although I've been a Democrat all my life, I see that the Democrats have been cooperating in this increasingly horrifying dance for a while now, and with remarkable dedication to the interests of the plutocracy, since Obama's election.

Deficit-spending and disinvestment have been Republican desiderata for a long-time, as you document. But, history is then, and in this now, both Republicans and Democrats are wrong, to be focusing on the deficit, instead of on the depression.

Obama's neoliberalism is as failed and pernicious a doctrine as Reaganism, and offers no fit alternative. We're screwed, because no sensible policy is even on the agenda.

A question on one point. You say: "So neither Reagan's tax cuts nor his defense buildup were particularly huge. The thing is, they were sustained. Even a small deficit adds up over time, and sure enough, by the end of the Reagan-Bush era, our national debt was almost double what it had been at the start, despite solid economic growth for most of that period."

As the debt grew under Reagan, this should have been dumping money into the private sector. You say "despite solid economic growth" but couldn't your measurements of economic growth here be caused in part by that glut of money (as the government ran deficits)?

Republicans and Democrats own this crisis, and I don't care how neutral and cliche that sounds.

What party controlled Congress during the passing of the stimulus bill?

Who watered down their healthcare plan to please the opposing side, in a still Democratically controlled Congress?

Who came into the presidency naively believing he could play the role of a centrist, then allowed bills to pass, both on domestic and foreign policy issues, that were still neoconservative in nature?

I don't think I need to go into detail of how Republicans and that **** of a grassroots movement called the "Tea Party" (properly mocked as Tea Baggers) played a role. Their immaturity and batshit insanity should be apparent by now, unless you've been asleep for the past 10 years.

And that's what it ultimately came down to. The Republicans acted like that spoiled shrieking ill-mannered brat in a restaurant whose kicking and screaming is disturbing everyone around him. The Democrats are the bad parent that refuse to discipline the child, ignoring the pink elephant in the room.

Mike: "As the debt grew under Reagan, this should have been dumping money into the private sector. You say "despite solid economic growth" but couldn't your measurements of economic growth here be caused in part by that glut of money (as the government ran deficits)?"

Precisely. Tip O'Neill once said that (from memory) 'Of course the economy was great. I could throw a heck of a party for a few trillion!'.

Your argument for neutrality seems to be that Republicans are crazy, and Democrats are equally responsible because they didn't stop the Republicans from being crazy.

That doesn't sound like equal blame to me. It sounds more like you want to blame Republicans 75% and Democrats 25%. And that's just for current policy. I think we can all agree that Bush II owns this debt far, far more than any other individual.

Yes, when you are the party of Congress I expect a bit of backbone against an opposing political faction bent on irresponsibility. Doubly true for one whose actions the past 8 years before the 111th Congress and new administration carried severe repercussions to our society.

It's fairly absurd to deny that the S&P downgrade was caused by the irrational extremism of the teabaggized Republicans during the debt-ceiling hostage crisis. In the first place, S&P pretty much said that that was the issue. In the second place, the debt has been increasing for years, but the downgrade came within days of the hostage crisis. It's pretty clear where the cause-and-effect relationship lies.

And Noah knows how to make a graph. Don't make sneaky accusations, please.

Noah - pretty good post, but you suffer from a failure of cynicism.

Reagan seems to have done more than just boost the debt during his term. By shifting us from an era of steadily falling debt numbers to steadily rising ones, he seems to have created a political "new normal"

Every economic measure you can think of from GDP growth to real median income changed course right around 1980. The new normal is real, deliberate, and Republican.

It is easily possible that, if Clinton had allowed these spending cuts to take place, debt would have fallen by even more than it did.

But it's more likely that the spending cuts would stifled the economy, and revenues would have fallen, just like they are now. Don't make the Obama mistake and walk yourself over to the enemy position.

, by his own admission he should not get the credit for the fall in debt that followed. Nobody should.

Democrats could possibly have allowed Bush to shift entitlement spending from Social Security to Medicare instead of raising it overall, but they chose not to.

They protected a largely self-funding program from the idiotic Rethug plan. This is no trade-off to part D. It is protecting America's seniors from getting raped by Wall St. You really fly off the tracks here.

So, yes, the Rethugs own the downgrade - and far, far more than you have indicated.

A little over a year ago I did an analysis of government size (expenditure as a percent of gdp) with respect to party control to see if it was true that Dems increased government more than Republicans. To determine which party was in control, I took the 2 out of 3 approach: Whichever party controlled at least 2 of the Senate, House, or Presidency was deemed in control, and had to 'own' the increase or fallback for the succeeding year (since policy decisions made during this congress largely take effect the following Oct 1). You might want to go back to your graph of congressional control and re-examine the debt and see if that makes a difference (I didn't look at debt accumulation, just government expenditures.)

Curiously, I found (using a simple p-analysis) that you couldn't say with 95% confidence that either party was worse in increasing expenditures looking at the series from 1970 to 2009 (40 years). But, expenditures and debt are two different animals!

You seem like a reasonable guy, but your history is potted. Herewith an alternative story:1. When Ronald Reagan assumed the Presidency in 1981, he faced two challeges: stagflation in the economy and a Soviet empire on the march. He defeated both. Controlling domestic spending was a lower priority and, in any case, controlled by a Democratic Congress.2. The Reagan tax cuts were passed by Congress in 1981, but phased in over three years. They took full effect in 1983. They led to a 40% increase in revenues over the next 4 years. So any deficit problem was due to spending, some of which helped defeat the USSR.3. To write that Reagan increased taxes as a result of his tax rate cuts is misleading at best. When ERTA was being debated in Congress, Democrats led by Dan Rostenkowsii (Chairman of the House Ways and Means Commitee) wanted to get in the act, which led to what was then called a "feeding frenzy." Congress enacted several dubious business tax breaks, such as accelerated depreciation and "safe harbor" leasing. The following year these were repealed by TEFRA; most of the tax breaks never even went into effect. So to call this a tax increase is a stretch. Reagan never did increase the marginal tax rates enacted in 1983 and, indeed, lowered the top rate again in 1986 to 28%.4. Keynesian economists, most prominently James Tobin and Walter Heller, denounced the Reagan policies, calling them incomprehensible--"tight money and loose fiscal policy." They said it would lead to inflation. But instead they started a 25-year boom, with only two short recessions.5. The Clinton tax hikes in 1993 had only minor effect, despite the partisan rhetoric. They were imposed on a growing economy, and so were easily absorbed. (Revenues over the next 4 years increased 40%,just as in the Reagan years). The main effect of the Clinton tax hikes on the Federal budget was to help elect a GOP Congress. The budget wasn't balanced until 1998, when the Republicans were pushing Clinton to go faster than he wanted to.6. Other factors that helped the economy grow in the late 1990s: the capital gains tax rate cut (which resulted in increased revenues); inflation virtually zero (inflation acts just like a tax in calculating ROI), and the emergence of the internet (a tax-free zone).7. You write: "Reagan seems to have done more than just boost the debt during his term." Yes, he ended stagflation and won the Cold War.8. You write "we saw debt rising as a percent of GDP during an economic expansion under a Republican president " Actually Bush's cuts in marginal rates were passed at a time the economy was in recession (2003)-- and they produced an expansion 2003-2007. Revenues increased by 44% over this period. 9. You write "Despite the raft of tax cuts enacted as part of Obama's 2009 stimulus bill..." Obama's cuts in 2009 were all gimmicks (as were Bush's cuts in 2001 and 2008). They do not work. It's the marginal cuts in tax rates that produce growth. This has been the case under Presidents Harding/Coolidge, Kennedy, Reagan, and Bush II (every 20 years except for WWII). In each case, a sharp increase in revenue)10. You write "the S&P downgrade is about nutty Tea Party Republicans and broken U.S. institutions rather than about debt levels" Just backwards. Blaming the Tea Party for the downgrade is like blaming the doctor who tells you that you have cancer and that you have to stop smoking. As for "broken institutions," the system worked just as it is supposed to: the legislature forcing an overreaching executive to pull back. I think the S&P showed poor judgement in this call, and will come to regret it. But it is a well-deserved rebuke to Obama and $1.5 trillion deficits for the forseeable future. Poetic justice, I'd say.